Risk Off Ahead of Summit

Friday 8 June – Risk-off ahead of summit

Summary

Investors are exiting risky assets as chances of a constructive discussion on trade at the G7 summit dwindle.

Getting real

Interest rate realities are sinking back in ahead of what’s going to be a not particularly cordial G7 summit in Canada. It’s little wonder that risk-aversion has returned. Asian stock markets turned tail after MSCI’s APAC index rose for six days without a break to a near three-month high. Japan’s Nikkei fell 0.4%, partly driven by growth figures showing an even deeper reversal than expected. China’s main equity gauges also retreated, even shrugging off trade data reflecting unabated activity and probably growth, albeit not much of a rise in U.S. imports. European stock markets started definitively in the red, turning U.S. stock index contracts a darker shade of red.

Tump tweet sets the tone

Even under ‘normal’ circumstances, markets tend to write-off the chances that G7 summits will result in concrete communiques with lasting impact. The current U.S. administration back-tracked on climate-related pledges within weeks of the last meeting. It also took its first steps on the trade war path despite the anti-“protectionism” sentiments addressed in the prior G7 statement. With new U.S. tariffs now lodged against all but one of the remaining six members and Trump tweeting his still combative mood overnight, some leaders might be wondering if there might be more productive ways to spend their time this weekend.

Risk appetite evaporates

At worst, the main outcome the summit could generate is further rancour on trade and, ultimately, escalation of the conflict which has already seen a rapid proliferation of retaliatory tariffs. Unsurprisingly, then, risk proxies were on the rise in active avoidance of negative market impact at the start of next week. The Swiss franc was up against the euro and dollar as the yen saw the beginnings of a bid, whilst the 10-year Treasury yield’s arc back towards 2.9% stalled and upward momentum in Europe’s 10-year bund safe-haven also gathered pace.

Chink of light for dollar

Against this backdrop, persistent dollar bears were having their day but not everything their way. The dollar index successfully stabilised above 93.4 levels that threatened to turn an eight-session downdraft into a sustained decline. After all, one of the few certainties next week is that the Fed will hike. 25 basis points may be priced in, though Fund futures have steadily ground in still-modest but rising probability of the fourth speculated hike that has preyed on investors’ minds all year. A messy Downing St tussle that left PM May with her cabinet intact but more questionable standing and relations with Brexit minister frayed, capped sterling under $1.3455-1.348. The bid to break above had always looked doomed. Below Thursday’s $1.3371 spike low expect further bear attacks on $1.33. The fact sterling managed a thin bid against the euro was instructive. German industrial output weakening in line with an unexpectedly soft phase of recent data from Europe’s growth engine was one thing. As well, Italy’s 10-year bond spiked at open as the optics of the ECB’s provocatively flagged QE exit sank in. The yen was the key outlier with a rise against the greenback (also besting the euro) as the orderly flight to safety gathered pace.

All eyes on Charlevoix

Off the cuff comments from global leaders as they head into Charlevoix proceedings are quite likely to eclipse most of the week’s remaining economic release agenda. Canadian capacity, employment and housing starts were all that remained on the top tier. Particularly in the jobs readings, disappointment would push the dollar further into the C$1.30 handle after the greenback’s break above this morning.